WASIX Commentary (Q2 2021)
June 2021
As always, we begin our report this quarter with a presentation of Seven Canyons Strategic Income Fund (WASIX) and benchmark returns over the past quarter, one, three, five, and ten years. A quarter is such a brief period of time that the results presented are mostly random noise; they can’t be used to evaluate the fund. Even the results for a year are insufficient. For this reason, along with short term results, I also like to include the performance of the fund over the longer periods which are more likely to encompass both rising and falling markets, providing better information for assessing fund performance.
| Periods ended 6/30/21 | WASIX | MSCI ACWI Index | Bloomberg Barclays US Aggregate Bond Index | MSCI World Small Cap Index |
|---|---|---|---|---|
| Quarter | 16.42% | 7.39% | 1.83% | 5.07% | Year | 70.27% | 39.27% | -0.33% | 54.93% | 3 Years | 14.98% | 14.57% | 5.34% | 12.61% | 5 Years | 13.20% | 14.61% | 3.03% | 14.87% | 10 Years | 10.57% | 9.90% | 3.39% | 11.09% |
Data shows past performance. Past performance is not indicative of future performance and current performance may be lower or higher than the data quoted. For the most recent month-end performance data, visit www.sevencanyonsadvisors.com. Investment returns and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. The Advisor may absorb certain Fund expenses, leading to higher total shareholder returns. The Advisor has contractually agreed to reimburse Total Annual Fund Operating Expenses in excess of 0.95% until at least January 31, 2022. This agreement is in effect through January 31, 2022, may only be terminated before then by the Board of Trustees, and is reevaluated on an annual basis.
Stocks have again done well this quarter, echoing the recovery in the US economy. This strong performance also reflects expected future strength in the global economy. There were two key reasons for our strong returns this quarter. The first reason was that our top performers brought their A games.
Future PLC (FUTR) is a UK-based company which converts special interest magazines (e.g. TechRadar, DigitalCameraWorld, PC Gamer, Cycling, etc.) to an online format. This last quarter our large (near 10%) weight in Future Group PLC (FUTR LN) paid off, as FUTR rose nearly 64%, and contributed almost one third of WASIX’s 17% return. Some of FUTR’s growth has also been due to smart acquisitions. Added to the inherent faster-than-GNP growth of special interest offerings, these acquisitions should help revenues grow at a low-double-digit rate. Last year FUTR acquired TI Media, the UK’s dominant magazine company. This year FUTR added GoCo, a price comparison website. Margins should improve due to the lower cost of digital versus print production and distribution, leading to mid-teens bottom-line growth. FUTR’s recent rise has been fueled by rapidly realizing greater-than-expected synergies between their business and that of TI Media.
Another strong performer was momo.com (8454 TT), adding more than two points to our returns. momo is the Amazon of Taiwan, offering online shopping for a wide variety of goods, paired with a logistics network to facilitate the rapid delivery of purchases. As Taiwan is a fairly small market, momo was able to establish a stronghold before Amazon even considered entering Taiwan. At this point, given momo’s dominance, it’s unlikely that Amazon will even try to enter the market.
Radico Khaitan (RDCK IN) is the final stock which contributed more than 1% to our returns. RDCK is an Indian distiller and distributor of alcoholic beverages. India’s alcohol consumption is on the low side, at 5.7 litres per capita—less than Italy, but more than most LatAm countries. However, with 1.3B Indians, the market is huge. On top of their unbranded wholesale business, RDCK has added a successful retail business based on their own brands. For example, RDCK’s Magic Moments vodka recently became the top selling vodka in India. RDCK also earned a place in the Indian Fortune 500.
The second reason for WASIX’s strong performance is that we’ve continued to avoid holding large weights in declining stocks. This quarter no stock subtracted as much as 1% from our returns. Of our bottom five stocks, three were held at a “dip your toe into water” weight, with significant weight in only two declining stocks.
We owned 2% of AU Small Finance Bank (AUBANK IN), a well-run Indian bank which makes small-ticket, secured retail loans to the unbanked self-employed and low-income segments, with a focus on rural and semi-urban markets. AUBANK suffered from India’s second wave of Covid this quarter. We also held nearly 2% of Mo-Bruk (MBR PW), which is a Polish waste disposal company. Mo-Bruk’s stock was hit by changing regulations regarding waste disposal. We continue to hold both AUBANK and MBR, as we believe results this quarter were only a hiccup in their long growth runway.
We added several new companies this quarter. As always, our search is for companies with the ability and the willingness to pay a growing stream of dividends. Three of the new additions are Flatex-DEGIRO, Perfect Medical, and Bank of Georgia.
Flatex-DEGIRO (FTK GR) is the only pan-European online broker (most EU brokers limit their focus to the country in which they are domiciled). FTK drives down fees to attract new clients. Customers have been growing at a 25% rate, which is expected to continue in the future. Few Europeans have converted to online transactions; less than 10% have online brokerage accounts, (with 40% of UK and Nordics being the exception), so there is ample room for growth. Since costs are mostly fixed, FTK should benefit from operating leverage as they grow. Earnings are projected to double this year, mostly due to FTK’s acquisition of DEGIRO. In the future, FTK is expected to grow at a more than 20% annual clip.
Perfect Medical (1830 HK) owns a rapidly growing chain of beauty shops in China. They offer non-invasive slimming and shaping services as well as traditional spa services. Shaping is done by ultrasonic cavitation, sometimes referred to as ultrasonic liposuction. We believe that the market for beauty treatments will grow at a high rate as more Chinese will have the money to afford such luxuries.
Bank of Georgia (BGEO LN) is one of the two major banks in the republic of Georgia. Georgia is an under-banked country where financial penetration is low (only 2.5% of population have a mortgage), so lots of runway for growth. Increasing financial penetration and 5%+ GDP growth will be key drivers. BGEO is currently growing loans over 10% annually. Due to the high profitability of these loans, BGEO was able to earn a 20% return. Yet their stock remains cheap, selling for only 4.2x earnings.
We sold seven more companies than we bought during the quarter. Holding fewer names will allow us to improve our focus on our remaining holdings. Most notable among our sales was Arrow Global (ARW LN), as it was our second-largest holding. We would have preferred to keep our large weight; ARW’s business model evolved by adding third party funds, which enabled ARW to make larger purchases of bad debt, and therefore earn a higher rate of return. Unfortunately, ARW agreed to a takeover by management.
We also sold our 2% holding in Avon Rubber (AVON LN), a maker of breathing gear for both military and police use. While we still like Avon, we decided it was better to step aside while they digested two large acquisitions. Another sale was HDFC Bank (HDB). We have owned this larger-cap bank for several years. While it continues to be an excellent bank, we decided to exit as HDB is too large for our small-cap focus.
OUTLOOK
Per our recent report, the economic outlook is unclear; some factors point to continuation of the post-Covid growth surge, while others suggest the rise is about to flatten or even reverse. Rather than owning victims of these macroeconomic fluctuations, we prefer to search for all-weather companies which will be able to thrive in almost any environment.
For a list of current top ten holding and performance charts, please click here.
Dividends are not guaranteed and a company’s future abilities to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
An investor should consider investment objectives, risks, charges, and expenses carefully before investing. To obtain a Prospectus, which contains this and other information, visit www.sevencanyonsadvisors.com or call us at +1 (833) 722-6966. Read the prospectus carefully before investing.
Seven Canyons Funds are distributed by ALPS Distributors, Inc.